Comment of the President of the Management Board of Budimex SA Dariusz Blocher to financial data from the consolidated financial statements of the Budimex Group for the first three quarters of 2018

News date: October 31, 2018

At the end of the first three quarters of 2018 the Budimex Group recorded an increase in sales revenues by 18% compared with the same period of the preceding year, and posted an EBITDA margin of 5.6%. In the third quarter of 2018 the profitability of the Budimex Group was higher and amounted to 6.7%, this being attributable to the recognition of the profit/loss on the sale of the subsidiaries Elektromontaż-Poznań S.A. and Investment Office “Grunwald” S.A. The impact of the transaction on the consolidated financial statements was in line with the preliminary estimate specified in current report no. 64/2018 and amounted to PLN 44 million in the gross profit item.

The construction market has been maintaining a buoyant growth rate for several quarters. Construction and assembly production rose by 22.9% over the first 9 months of 2018, as against the same period of the previous year. At the same time, the data from the Central Statistical Office imply a deterioration in the sector profitability - gross profit of the construction sector amounted to 2.3% after the first six months of this year, compared to 2.8% in the first six months of the previous year. In view of the scale of ongoing projects, coinciding with the deteriorating situation in entities operating in the real estate sector, the scenario for subsequent quarters as a continuation of the downward trend appears to be realistic.

After the first three quarters of 2018 the sales in the construction segment of the Budimex Group amounted to PLN 5.1 billion and were 18% higher than in the corresponding period of the previous year. Despite very demanding market conditions, the EBITDA margin of the construction part stabilised at 3.8%, considerably above the market benchmark.

The industry is facing the challenge of implementing a major investment programme amidst liquidity and profitability problems. The clear signals of significant payment delays, terminated contracts and the financial difficulties of companies, including bankruptcies, are coming from the market. The current situation of the Budimex Group is stable due to the selective approach to tendering and attention to keeping the order book profitable. Nevertheless, market difficulties are reflected in the level of profitability and the lower net cash position.

The order book for the Budimex Group reached PLN 11.0 billion in late September 2018, slightly higher than at the end of the previous quarter. Over the first three quarters of 2018, we concluded contracts worth PLN 5.6 billion. On considering the safe level of the order book and the very difficult market situation, we are selective in our approach to new contracts. Prolonged tendering procedures increasingly often force bidders to withdraw tenders. This has helped us acquire contracts over the last few months, climbing up in the ranking, despite a prudent approach to submitting tenders. Thanks to the additional contracts we outperformed internal contracting plans and have kept the portfolio of orders at a good level, while maintaining a responsible approach to calculating the margin.

After the first three quarters of 2018 we recorded a seasonal drop in the level of cash. The net cash position amounted to PLN 620 million in late September. In September 2017 the net cash balance amounted to PLN 1,471 million. The balance of cash fell in 2018, as a result of such factors as seasonally lower cash flows from operations, including a significant decline in contractual advance payments. The financial difficulties of the industry have led us also to the decision to further increase the scale of financing subcontractors through earlier payments and frequent invoicing of works. The trends persists among investors to be late in the process of accepting and invoicing completed works. The increase in the bureaucracy level translates into a higher level of non-invoiced sales, which was 20% higher in late September 2018 than in September of the previous year, this having an adverse impact on the balance of cash. In addition, on considering the record level of the order book and the increase in the prices of subcontracting services, over the first three quarters of 2018, we incurred capital expenditures of approximately PLN 100 million as compared to approximately PLN 50 million in the same period of the previous year.

Between January and September 2018 Budimex Nieruchomości clients signed 1,335 notarial deeds, including as part of the subsequent stages of the Wiślany Mokotów, Nowe Czyżyny and Osiedle przy Rolnej projects. Revenues from the sale of the property development segment posted a hike of 6% over the previous year and amounted to PLN 412 million. The operating profit for the first three quarters amounted to PLN 57 million with a profitability of 14.0%.

The advance sales in the property development segment reached a level of 810 apartments after the first three quarters of 2018 as compared to 1,220 in the same period of the previous year. The drop in the rate of pre-sales is mainly due to shifts in launching new projects. This is a consequence of the delayed finalisation of the purchase of new land and prolonged administrative procedures involved in the issuing of building permits. There are about 3,000 apartments under construction, and 1,192 apartments are waiting for customers. We have spent PLN 145 million on land in Kraków, Poznań and the Tri-City over the past nine months, which should allow us to construct over 2,800 premises. As a result, the land bank expanded to 9.6 thousand flats in late September 2018.

Demand on the housing market remains high. However, an upward trend may be observed in the prices of construction and land, which translates into an increase in housing prices. This may have an adverse impact on the pre-sale rate of new development projects over the coming quarters.

The headcount in Budimex Group exceeded 7,000 in late September 2018, and was similar to the situation at the end of June. The policy of expanding own resources, ongoing for several quarters, has proved to be a good choice. Thanks to a team of manual workers we are more independent in the ongoing work and can manage the risk of price increases for services dependent on the labour cost. Additional intensive investments in machinery strengthen our position when making decisions about the selection and employment of subcontractors.

We are a company that, despite difficult market conditions, fulfils its contractual obligations and carries out the tasks entrusted to us in accordance with the provisions, while ensuring optimal quality. The industry is increasingly affected by the increase in the cost of materials and labour. Our contractors are reporting a steady deterioration in their financial standing, which results in more and more bankruptcies. Therefore, we are consistent in our attempts to support our subcontractors by providing earlier payments and arranging for frequent and efficient invoicing of completed works.

Given the lack of indexation solutions coupled with a galloping increase in the prices of building contractors, the profitability of the coming quarters in the industry and in the construction segment of the Budimex Group may remain under pressure. We perceive the current level of the Group's order book as safe. We assess its standing as relatively good and do not expect a breakdown in profitability. Even though the situation in the industry continues to deteriorate, we will strive to maintain profitability above the market ratios.